By the Numbers

Low beta managers perform well through September

| October 14, 2022

This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.

CLO managers have struggled to keep up with the market this year. After a soft performance in the first two quarters, the average manager’s performance trailed the broad leveraged loan market in the third quarter. But not all managers are average. Managers with portfolios that show a low beta to the broad market have generally outperformed with positive excess returns since June, a bright spot in the performance track record this year.

The Morningstar/LSTA Total Return Index posted a positive return of 1.61% for the three monthly reporting periods ending in September, after accounting for managers’ reporting dates. The average loan portfolio for managers with five or more actively tracked deals had a beta to the index slightly above 1.02.  With that beta, the average portfolio should have delivered a total return of 1.64%, but instead, managers on a weighted average basis posted a return of 1.58%, leaving the portfolio behind the index by 6 bp after adjusting for risk.

The excess return posted by individual managers ranged from 56 bp at the high end to -106 bp at the low end. Of the 82 managers tracked, 35 or 43% outperformed the index during the quarter and most of them were low beta managers. On a weighted average basis, low beta managers delivered a 14 bp excess return to the index through September.

Managers’ total returns improved, but still trailed the index

Managers finished the third quarter with a positive weighted average total return of 1.58%, a 208 bp improvement from their performance in the three months through August.  But on an average excess return basis, managers’ loan portfolio performance continued to trail the broad market after adjusting for CLO reporting dates and loan portfolio risks (Exhibit 1).

Exhibit 1. Managers’ average excess returns underperformed through September

Note: The data shows the average excess return relative to the Morningstar/LSTA Total Return Index for 82 managers with five or more active deals. The data cover performance for the three-monthly reporting periods ending on or before September 20, 2022.
Source: Intex, Markit, Amherst Pierpont Securities

Low beta managers scored a big win in 3Q, a 30 bp lead over high beta peers

Individual manager beta ranged from 1.22 at the high end to 0.90 at the low end, reflecting the wide difference in the amount of risk managers took.  Weighted by their CLO AUM, 28 low beta managers, those having a beta less than 1, outperformed the market in the third quarter by 14 bp, the highest weighted average excess return year-to-date (Exhibit 2).   By contrast, managers who had a beta greater than or equal to 1 underperformed the market by 16 bp.  Additionally, low beta managers outperformed their high beta peers in five out of seven 3-month reporting periods.

Exhibit 2: Low beta managers were better performed in most of the periods

Note: The data cover performance for the three-monthly reporting periods ending on or before September 20, 2022.  The high beta group includes 54 managers whose beta is over 1 with a median of 1.05.  The low beta group includes 28 managers whose beta is no more than 1 with a median of 0.98.
Source: Intex, Markit, Amherst Pierpont Securities.

Loan prices have contributed to the managers’ positive excess return

Loan prices have shown the strongest positive relationship with managers’ excess returns through the third quarter at a correlation of 0.75, followed by a modest, 0.14 correlation between the weighted average rating factors and managers’ excess return (Exhibit 3).   The remaining loan attributes all had a weak correlation with managers’ excess return. Of course, loan price tends to correlate with portfolio beta since low prices typically signal higher risk and higher beta and high price signals the opposite.

Exhibit 3. Loan prices are the most correlated to managers’ excess return

Note: Data shows the correlation of each measure, calculated across each manager’s outstanding deals, with excess return or alpha as measured for 82 managers through September.
Source: Intex, Markit, Amherst Pierpont Securities.

Low beta managers hit the trifecta

The median information ratio of CLO deals tracked by Amherst Pierpont implies most managers have some consistency in long-run run performance, but a few CLO managers delivered positive excess returns in each of the past three quarters.  Except for CSAM, all managers who consistently outperformed in each quarter are low beta managers (Exhibit 4).

Exhibit 4. Managers who outperformed in each of the past three quarters are mostly low beta managers

Source: Intex, Markit, Amherst Pierpont Securities

For the three months ending in September, Blackrock, AIG, CVC, Elmwood, and Goldentree led all managers with the highest excess return.  A list of all managers and their level of excess return is below (Exhibit 5).  A complete list of managers and their returns is here.

Exhibit 5. CLO manager performance for the three months ending September

Note: Performance for managers with five or more deals issued since January 1, 2011, and tracked by APS. Performance attribution starts with calculated total return on the leveraged loan portfolio held in each CLO for the 3-month reporting period ending on the indicated date. CLOs, even with a single manager platform, may vary in reporting period. The analysis matches performance in each period to performance over the identical period in the S&P/LSTA Leveraged Loan Index. Where a deal has at least 18 months of performance history since pricing and no apparent errors in cash flow data, the analysis calculates a deal beta. The deal beta is multiplied by the index return to predict deal return attributable to broad market performance. Where no beta can be calculated, the analysis uses the average beta across manager deals weighted by the average deal principal balance over time. Any difference between performance attributable to beta and actual performance is attributed to manager alpha.
Source: Intex, Markit, Amherst Pierpont Securities.

A link to Amherst Pierpont’s latest CLO manager bubble chart (Exhibit 6) and to data on more than 140 managers and more than 1,000 active deals is here.

Exhibit 6. Amherst Pierpont CLO manager bubble chart

Source: Intex, Markit, Amherst Pierpont Securities

Caroline Chen
cchen@apsec.com
1 (646) 776-7809

This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of Amherst Pierpont’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, Amherst Pierpont may act as a market maker or principal dealer, and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.

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